Wednesday, 3 September 2014

One thing, among others that is glaring in the recent guidelines released by the Central Bank of Nigeria (CBN) on the operations on the Holding Companies is the fact that the apex bank has resolved to enhance transparency in their operations, through stringent guidelines.

Analysts believe that these guidelines, when they are followed strictly by the organisations, will bring respite to the banking sector.

Indeed, one of the transaction prohibitions as stated by the CBN is that they should not borrow from the Nigerian banking system for the purpose of capitalising themselves or any of their subsidiaries.

Also, they are not to obtain a loan based on the guarantee of their banking subsidiary, except where the loan is secured by dividend income or Service Level Agreements by the financial holding company for services to their banking subsidiaries.

However, where the subsidiary fails to declare the expected level of dividend or redeem its obligations arising from the Service Level Agreement, the loan shall be deemed to be a reduction in the capital of the subsidiary in computing its capital adequacy ratio.

In the Guidelines for Licencing and Regulation of Financial Holding Companies (HoldCo) in Nigeria released last week, the CBN said credit by a banking subsidiary to its holding company would be regarded as a return of capital and deducted from the capital of the bank in computing the bank’s capital adequacy ratio.

“Any bank lending to subsidiaries within its financial holding company group would attract 100 percent risk weight (if it is fully secured) otherwise it would be removed from the capital of the bank when computing capital adequacy ratio,” the CBN stated in the guidelines.

Financial holding companies are barred from engaging in any transaction or maintain any business relationship with any of its subsidiaries, except such transaction is conducted at arm’s length.

Under appointment of directors and top management, the apex bank in the guidelines barred the financial holding companies from appointing any member of its board to serve on the board of its subsidiaries, except with the prior written approval of it.

Where such an appointment is approved, the number of directors from the financial holding company at any point in time shall not exceed 30 percent of the membership of the board of directors of each of the subsidiaries, the apex bank said in the Guidelines for Licencing and Regulation of Financial Holding Companies (HoldCo) in Nigeria released on Friday.

The CBN in 2010 introduced a new banking model, which requires banking groups with non-core banking activities to incorporate a banking structure.

To facilitate the establishment and operation of holding companies, the apex bank, in collaboration with stakeholders, developed guidelines for setting up, regulating and supervising financial holding companies in Nigeria.

The guidelines stipulate minimum licensing, governance and prudential requirements for prospective holding companies. It also prescribes procedures for the conversion of an existing institution to a holding company structure.

“It is expected that the guidelines … shall ensure adequate ring-fencing of financial institutions under the purview of CBN. The guidelines should be read in conjunction with other relevant CBN regulations on the subject,” the CBN said through Kevin Amugo, director, financial policy and regulation department of the apex ban, in a circular to all banks and other financial institutions.

According to the guidelines, a financial holding company shall have a minimum paid-up capital which should exceed the sum of the minimum paid up capital of all its subsidiaries, as may be prescribed from time to time by the sector regulators (Where the financial holding company owns 100 percent of the subsidiaries).

Where the financial holding company owns less than 100 percent of the subsidiaries, its minimum paid up capital shall exceed the summation of its proportionate holding in the subsidiaries.